CIRCLE Presented by Manish Shah Chartered Accountant Practical Issues in Scrutiny Assessment Contents Scrutiny Assessments Pre Assessment procedures Issues in Scrutiny Assessment ID: 321589
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J. B. NAGAR CPE STUDY CIRCLE
Presented by: Manish Shah Chartered Accountant
Practical
Issues in Scrutiny AssessmentSlide2
ContentsScrutiny Assessments
Pre- Assessment proceduresIssues in Scrutiny Assessment Re-assessment Post- Assessment proceduresTP Assessments; Protective Assessments, and Order Giving Effect to orders u/s. 263, 250 & 254
Nov 24, 2012
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2Slide3
Assessments
“Assessment” generally includes all proceedings - S. Sankappa
v. ITO (68 ITR 760)(SC)
“The word “assessment” is used in the Act in a number of provisions in a comprehensive sense and includes all proceedings starting with the filing of the return or issue of notice and ending with determination of tax payable by the Assessee”
Nov 24, 2012
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3Slide4
Assessments Covered
143(3): Scrutiny Assessment144 : Best Judgement
147 : Reassessment proceedings
144C
: Draft Orders in respect of Transfer
Pricing Assessments
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4Slide5
Pre-assessment Procedures
Return of IncomeAnnual Accounts and Tax Audit report – relevance in Scrutiny Assessments
E-filing
Scenario
vis
a
vis
aggressive
and debatable
claims
Providing Disclosure and notes – How and when
AIR information
Nov 24, 2012
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Intimation u/s.143(1)
AO only to process the return under section 143(1) in following manner
:
Make adjustment to total income for the
arithmetical
mistakes or incorrect claim which is
apparent from any information in
return
;
Compute Tax and interest on the basis of TO so computed;
Determine Demand or Refund – After considering tax paid and reliefs claimed;
Issue intimation for demand payable or refund due and grant refund, if determined
Nov 24, 2012
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6Slide7
Intimation u/s.143(1)
‘incorrect claim’
A
claim made on the basis of an entry in the return which is inconsistent with another entry of the same or some other item in such return;
A claim, in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or
In
respect of deduction, where such deduction exceeds specified limit.
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Intimation u/s.143(1)
Intimation shall be sent within 1 year from the end of the financial year in which the return is made.Where
, after making the above adjustments either no sum is payable by the assessee or no refund is due to him, the acknowledgment of the return shall be deemed to be intimation u/s 143(1
).
Section
143(1D) provides that processing of a return u/s 143(1) shall not be necessary, where a scrutiny notice has been issued to assessee under sub-section (2) (applicable from July 1, 2012
).
Is Intimation u/s. 143(1) is appealable?
Nov 24, 2012
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Initiation of Scrutiny Assessment
Issue of Notice under section 143(2)
Where
the return has been made u/s 139 or in response to notice u/s 142(1), the assessing officer shall if he considers it necessary or expedient to ensure that-
The
assessee has not understated the income; or
Has not computed excessive loss; or
Has not underpaid the tax in any manner
serve a notice on the assessee u/s 143(2) requiring him to attend his office or to produce or cause to be produced any evidence on which the assessee may rely in support of the return on a date
.
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9Slide10
Notice u/s. 143(2)
Time limit: Notice u/s 143(2) to be
served
within expiry
of 6 months from the end of financial year in which the return is furnished
. –
Meaning of “Service”
Notice
u/s 143(2) cannot be served if no return has been furnished by the
assessee. In such a case, notice u/s. 142(1) has to be first issued.
If Notice u/s 143(2) is not served, an assessment cannot be made u/s 143(3
). However, AO may take recourse of section 144.
Impact
of section 292B and section 292BB
Besides serving notice u/s 143(2), the assessing officer normally also serves a notice u/s 142 for producing books of accounts, statement of assets and liabilities etc
.
Defects in Notice under section 143(2) – whether renders assessment invalid?
Nov 24, 2012
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Inquiry - Notice u/s. 142(1)
For the purpose of making an assessment, the Assessing officer may: When Return of income is not filed u/s 139(1) or before the end of the relevant assessment year-
Serve a notice u/s 142(1)(
i
) for furnishing the Return of income
When Return of income is already filed-
Serve a notice u/s 142(1)(ii) to produce such documents or accounts as he may require,
Serve a notice u/s 142(1)(iii) to call for information he may require including statement of assets & liabilities
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Obtaining information
For the purpose of obtaining full information in respect of income or loss of any person, the assessing officer may make such enquiry as he considers necessary.
While section 142(1) empowers the assessing officer to collect the information from the assessee himself, section 142(2) empowers him to collect information from sources other than the assessee.
The assessing officer shall not require the assessee to produce any accounts relating to a period more than three years prior to the previous year. Where the AO issues a notice calling for production of accounts relating to earlier years and one of those falls beyond the prescribed three-year time limit, the whole notice cannot be treated as bad, inasmuch as the illegal portion of notice as regards to one of the years is clearly several from the rest of the terms of the notice which are legal –
Murlidhar
Madanlal
v. CIT (20 ITR 231 (Pat.).
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Audit of Accounts - Section 142(2A)
The assessing officer, if – having regard to the nature and complexity of the accounts of the assessee and
in the interest of the revenue
is of the opinion that it is necessary so to do, may, at any stage of the proceedings before him, direct the assessee to get the accounts audited by a Chartered Accountant nominated by the Chief Commissioner / Commissioner of Income Tax.
The
assessing officer can issue such direction only with prior approval of the Chief Commissioner/ commissioner of Income Tax [section 142(2A)].
Direction
of audit can be given even if the accounts are already audited under the Income Tax Act or under any other law [Section 142(2B)].
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13Slide14
Sec.142 (2A)
The direction to get accounts audited can be issued only in the course of pending assessment proceedings and not after the completion of assessment. The assessment also includes reassessment.No appeal is possible against order u/s 142(2A) for audit of accounts.
Special audit cannot be ordered only on the basis of doubt regarding correctness accounts. Before an approval is sought for, the assessing authority must form an opinion regards the said twin conditions.
There should be an honest attempt to understand the books of account of the assessee.
There has to be an application of mind on the part of the assessing authority.
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Quasi-judicial Proceedings – Indian & Eastern Newspapers Society v. CIT (119 ITR 996)(SC)
Assessment to be based on material and information and on the basis of conjectures and surmises – Dhakeshwari Cotton Mills Ltd (
26 ITR 775) (SC)
Principle
of natural
justice applies
(CIT v. Raja Ginning
Udyog
(268 ITR 383) (MP)
Res
judicata
does not apply -
Dwarkadas
Morarka
(44 ITR 529)(SC). However principle of consistency applies (208 ITR 872)(Raj)
Principle of
Estoppel
does not apply to Department as well as to assessee. Mistake by one does not
estopp
another. CIT v.
Thanthi
Trust (137 ITR 735)Mad) &
Balmukund
Acharya
(
Bom
)(HC
)
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Assessment
– General
PrinciplesSlide16
Assessment – Practical Aspects
Manner and extent of furnishing detailsAIR ReconciliationIssue –wise Submissions
Details to be self explanatory else supported by explanatory notes
Additional Information
Recurring Issues
Fresh Claims and Deductions
Without Prejudice claims
Recourse to section 144A
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16Slide17
Time limit to Complete Assessment
From AY 2010-11 & onwards: An assessment u/s 143 shall be completed within 2 years from the end of the relevant assessment year;
From AY 2009-10 & onwards: Where reference
is made to Transfer Pricing Officer (TPO
), the time limit for completion of assessment would be shall be 3 years.
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Assessment Order
The assessment order should determine not only the total income of the assessee but also the amount payable by him. Where the order determining the total income is passed within the prescribed time limit but the tax payable is not determined within the prescribed time limit, assessment would be time barred.
The officer must assess the total income of the assessee in accordance with the provisions of the Act. It is not open to him to assess the income from one or more sources and leave the others undetermined. He cannot make piecemeal assessment nor can he make a provisional or tentative assessment - Debi Prasad
Malviya
v. CIT 22 ITR 539 (All.)
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18Slide19
Best Judgement Assessment (S. 144)
When can a best judgement assessment be made? (Sec. 144(1))
Failure to file ROI u/s. 139(1)
and
u/s. 139(4)/(5); or
Fails to comply with
all the terms
of the notice u/s. 142(1) or direction u/s. 142(2A);
or
Fails to comply with
all the terms
of notice u/s. 143(2
)
AND
Assessee is given an opportunity of being heard (issue of show cause notice)
Nov 24, 2012
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19Slide20
Section 144
In addition to above, the assessing officer is empowered to make best judgment assessment in the following situation:
Where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee; [See:
Madani
Construction Corporation P. Ltd. V . CIT (296 ITR 45) (
Gauh
.)]
Where the method of accounting u/s 145(1) has not been regularly
followed; and
Where accounting standards notified by the central government u/s 145(2) have not been regularly followed by the assessee.
Nov 24, 2012
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20Slide21
Section 144….
Issue of Show cause notice:Before proceeding with best judgement assessment, show cause notice u/s. 144 needs to be issued to the assessee.
No
such notice be issued in case notice u/s. 142(1) is already issued.
No
time limit specified
upto
which such notice needs to be issued.
Time limit for passing 144 order
- Sec
. 153(1
):
Assessment
u/s. 144 to be completed within 2 years from the end of the relevant assessment
year
Nov 24, 2012
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21Slide22
Issues related to section 144
144 Order needs to be a speaking order as regards:Reasons for conducting best judgement assessment
Basis of determining the tax liability
Caselaws
:
CIT V.
Ranicherra
Tea Co. Ltd. [207 ITR 979] (Cal.)
Oceanic Industries (India) Pvt. Ltd. (34 STC 546) (Cal.)
ACIT V.
Roopchand
Kharani
(66 DTR 104) (
Chattisgarh
)
AO needs to make an intelligent and well grounded estimate and thereby does
not have an absolute arbitrary authority
u/s. 144
Caselaws
:
S. N.
Hasan
V. New Gramophone House (AIR 1977 SC 1788) (SC)
State of Orissa V. Maharaja
Shri
B. P. Singh
Deo
(76 ITR 690) (SC)
Kanchwala
Gems V. JCIT (288 ITR 10) (SC)
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22Slide23
Issues related to section 144
Once books of accounts are rejected, then reliance on some entries in those books to make separate addition is not justifiedACIT V.
Renu
Mukherjee
(177
Taxmann
58)(Del.)(Trib.)
Clause (a) to (d) - whether cumulative or alternative?
Supreme Court in
Buchiah
Setty’s
case (77 ITR 539) dealing under the 1922 Act held that the conditions specified are
‘alternative’
Kerala HC in Mubarak Trading Co (174
Taxmann
339) dealing under the present Act has held that the conditions are
‘cumulative’
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Income Escaping Assessment (Sec. 147)AO has to have a reason to believe that income has escaped assessmentObligatory to issue noticeReasons must be recorded in writing
ITO should have “reasons to believe” and not “reasons to suspect” [ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd.(2007) 291 ITR 500 (SC)]Limitation of issuing notice – 6 years from end of AYApprovals to be taken [sanctions]TypesNo Regular Assessment Regular Assessment, but within 4 years
Regular Assessment, beyond 4 years [Failure cases]
Cases where no time limit applies
Special cases of agent U/s. 163 [2 year time limit]
Assessment procedure
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Tabular presentation of Provisions
If no Regular Assessment1
If less than 4 Years
*
Nil
None
If more than 4 years
*
Rs. 1.00
lac
JCIT
If Regular Assessment
If less than 4 years
*
Nil
JCIT sanction [ITO]
If more than 4 years
*
Rs
. 1.00
lac
CCIT / CIT
Failure of Assessee
If Assessment as agent
Overall time
limit of 2 years from end of AY
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1
Including Assessment under Section 147
* From end of the Relevant Assessment Year
Overall time limit of 6 years from end of the relevant AYSlide26
“Escapement of Income”Explanation 2 to 147 [namely – but “also”]No
ROI furnished though income exceeded maximum amount not chargeable to tax;Return filed, no assessment made and the AO notices that Assessee has understated income or has claimed excessive loss, deduction, allowance or relief in the returnAssessment made, but Income under assessed, or Assessed at too low a
rate or Excessive
relief
;
or
Excessive loss or depreciation allowance or any other allowance
Escapement is
must
Assessed for later year is not escapement [Hum Boldt Wedag India ltd. (236 ITR 845) (Cal)]Pendency of valid return bars reassessment [
Deva Prasad Barua (75 ITR 18) (SC),
Ranchhoddas Karsondas (36 ITR 569) (SC
)]
Pending
Assessment proceedings [(51 ITR 557) (SC
)]
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Reasons to be recordedAbsolute must and it has to be recorded before issuance of notice
Forms foundation of the proceedingRecording it before issuance of notice is a mustSmt. Narinder Kaur 144 Taxation 527 (Punj)IBM World Trade Corporation 216 ITR 811 (
Bom
)
UOI Vs.
Rai
Singh 88 ITR 200 (SC)
Johri
Lal 88 ITR 439 (SC)Divekar 157 ITR 629 (Bom)Mechanically recording of reasons [Lokendra (155 ITR 629) /
Agarwalla (189 ITR 786)Factually incorrect or misguiding [
Suganchand (105 ITR 743(]Cannot be waived by the Assessee [
Doshi
(113 ITR 22) (
Guj
)]
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Communication of the Reasons Reasons need not be communicated with the notice
Law pronounced by the SC in the case of GKN DriveShafts (259 ITR 19)AO issues the noticeAssessee files the returns and asks for copy of the reasons recorded [better if you file initial objections or denial of the validity]
AO provides the copy of the reasons recorded
Assessee filed the objections
AO disposes off the objections by speaking order
AO then proceeds with the assessment
Whether the order by AO disposing off the objection is an appealable order? – Writ or appeal against normal assessment
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28Slide29
Issue of Notice
Concept is “issue” of notice and not “Service”The limitation applies to issuance of notice and not of service R. K. Upadhyaya
Vs.
Shanabhai
Patel 166 ITR 163
However, service
of
valid notice is a must for reassessment
Non-service of the valid notice is jurisdictional defect and cannot be cured T. R.
Rajakumari
96 ITR 78 (Mad)
If the notice is invalid for any reason or service is invalid the entire proceedings gets vitiated and becomes null and void [Y.
Narayana
Chetty
35 ITR 388 (SC)
Notice could be invalid for the following reasons
Vague [about assessment year / person / status, etc.] [
Chandiprasad
119 ITR
340;
Madablal
144 ITR
745
;
Adinaryana
65 ITR
607]
Not served in accordance with law [
Jayanthi
120 ITR 576]
Incorrect Assessment Year [
Kurban
Hussain
82 ITR 821 (SC
)]
Not Signed [
Gooyee
62 ITR 109 (Cal
)]
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29Slide30
Objections to the Reasons Change of Opinion
143 (1) Notice – No Opinion and therefore no question of change of opinion Bharat V. Patel [268 ITR 116 (Guj)]Mere Change of opinion does not entitle the AO to re-open the assessment – even within the period of 4 years [Kelvinator 256 ITR 1 (Delhi) (FB) Jindal Photo (234 ITR 170
)
No
“change of opinion” if AO does not specifically apply his
mind –
Usha
International Ltd (Delhi HC)(Full Bench)
Pending Assessment
Notice U/s. 148 cannot be issued when valid return pending
Once the time limit for issuance of notice U/s. 143 (2) has passed, the 148 notice can be issued
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30Slide31
Regular assessment > 4 YearsProviso to Section 147
Where an assessment U/s. 143 (3) or S. 147 made earlierNo action under Section 147 beyond 4 years from end of the A.Y. unless, income has escaped assessment on account of failure on the part of the assessee to:File the return of income; or
Fully and truly disclose all material facts necessary for the purpose of making an assessment
“
Failure” on the Part of the Assessee
“Material Facts”
Therefore, mere escapement of income is not sufficient
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31Slide32
Scope of Re-assessment
Need not restrict himself to the reasons recorded - Fishing enquiry – whether permissible
When
original reasons recorded are held to be
invalid
, the re-assessment cannot be confirmed on other
grounds -
[
Chunnilal
160 ITR 141]
Reasons
recorded on Grounds A and B
Grounds A and B no addition made;
Additions made on Ground C – Not Valid
What
is set-aside in the re-assessment is only the previous under-assessment and not the whole assessment
.
Assessee cannot
re-agitate
questions which had been decided in the original
assessment - [Sun
Engineering Works 198 ITR 297 (SC
)
However, the assessee can put forward his claim for expenditure relatable to escaped income [
Caixa
Economica
210 ITR 719 (
Bom
)]
Reduction in originally assessed income, refund of tax, assessment of loss, etc. not permissible [
Kasinath
4 ITC 472,
Satyendra
4 ITC 447,
Niranjan
52 ITR
882
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32Slide33
Section 292B and 292BB
Effect on assessmentsApplicability of sec 292 BB – Assessment Year 2008-09 and onwards.
For earlier A Y’s – objections can be raised at any forum
Kuber
Tobacco Products P Ltd (117 ITD 273) ITAT Delhi
Nov 24, 2012
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33Slide34
Other Aspects in assessmentsScrutiny
Assessment with reference to AIR (Sec. 285BA)
Transfer Pricing Assessments and DRP
Protective Assessments
Order Giving Effect to 263, 250, 254
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34Slide35
Post Assessment ProceduresPenalty Proceedings
Stay ProceedingsFiling of Appeals and Revision ApplicationsRectification ProceedingsAdditional Claims post assessmentNov 24, 2012
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Thank You
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